There have been several major accomplishments within the past fiscal year. Neuromodulation of neural networks, whereby a selected circuit is regulated by a particular modulator, plays a critical role in learning and memory. Among neuromodulators, acetylcholine (ACh) plays a critical role in hippocampus-dependent memory and has been shown to modulate neuronal circuits in the hippocampus. However, it has remained unknown how ACh modulates hippocampal output. Here, using in vitro and in vivo approaches, we show that ACh, by activating oriens lacunosum moleculare (OLM) interneurons and therefore augmenting the negative-feedback regulation to the CA1 pyramidal neurons, suppresses the circuit from the hippocampal area CA1 to the deep-layer entorhinal cortex (EC). We also demonstrate, using mouse behavior studies, that the ablation of OLM interneurons specifically impairs hippocampus-dependent but not hippocampus-independent learning. These data suggest that ACh plays an important role in regulating hippocampal output to the EC by activating OLM interneurons, which is critical for the formation of hippocampus-dependent memory. In addition, although much progress has been made in understanding type II theta rhythm generation under urethane anesthesia, less is known about the mechanisms underlying type I theta generation during active exploration. To better understand the contributions of cholinergic and NMDA receptor activation to type I theta generation, we recorded hippocampal theta oscillations from freely moving mice with local infusion of cholinergic or NMDA receptor antagonists to either the hippocampus or the entorhinal cortex (EC). We found that cholinergic receptors in the hippocampus, but not the EC, and NMDA receptors in the EC, but not the hippocampus, are critical for open-field theta generation and Y-maze performance. We further found that muscarinic M1 receptors located on pyramidal neurons, but not interneurons, are critical for cholinergic modulation of hippocampal synapses, theta generation, and Y-maze performance. These results suggest that hippocampus and EC neurons recruit cholinergic-dependent and NMDA-receptor-dependent mechanisms, respectively, to generate theta oscillations to support behavioral performance.